Indiana Bankruptcy Alternatives: What Other Options Do I have Instead of Bankruptcy?


Most people turn to bankruptcy as a “last resort.”   Therefore, it is important to discuss some of the several alternatives to filing Chapter 7 or Chapter 13 bankruptcy.    Keep in mind that no person needs to be turned away from bankruptcy relief.  If you need bankruptcy relief, file bankruptcy.   It is important to just make sure that you explore options in order to make the best choice for your situation.

Reducing Your Expenses

Reducing expenses could create a new financial situation where you will be capable of paying back or settling your debts.   Creating a budget where you only are required to spend 60-80% of your income for living expenses will create a system in which you can many times repay your debts with the 20-40% remaining.

In reducing your expenses, think about this new question: how can I live a good lifestyle for as close to $0 per month as possible.  It can be a radical and life-changing.  Remember, anything is possible.  However, keep in mind that limited income or excessive debts may make reducing your expenses insufficient alone to repair the entire financial situation.  If you are too far into debt, you may still need to file bankruptcy.

Debt Settlement

Debt settlement can be a powerful tool for dealing with large debts.   Many times your creditors will take 30%-50% of the current debt you owe to them in order salvage what they can out of a bad situations.  In certain situations, creditors may take even less amounts such as 10%-20% to settle the debt, especially if the denial of settlement is backed up by the threat to seek bankruptcy relief.

Remember, creditors would rather receive “something” instead of “nothing.”   Also, your creditors may receive tax benefits from settling a debt.   Make sure to consult with an accountant, however, because you may receive a “1099” in the mail that reports to the IRS about the debt settlement.   You may have to pay taxes on the forgiven portion of the debt in some situations.   Also, in traditional debt settlement, creditors prefer a lump sum single payment instead of multiple payments.   If you do not have a sufficient source of funds, debt settlement may be impossible.

Debt Consolidation Loans and Services

Non-bankruptcy debt consolidation occurs when either 1) you apply for a loan to repay all of your debts in order to pay all of your debts in one payment or 2) you sign a contact for a company to “consolidate” all of your debts so that each creditor receives payments out of the payment you make to the debt consolidation company.

Non-bankruptcy debt consolidation has hidden dangers.  First, the companies that pay your creditors for you out of a single payment usually cannot guarantee that all of your creditors will “stay in line.”  Some of your creditors may refuse the agreement and then contact or sue you during your repayment plan.

Debt consolidation loans can be a powerful tool, but they can also be dangerous.  Remember, debt consolidation does nothing or little to take care of your debts: the same debts remain.   If you consolidate all of your unsecured debts into a second mortgage loan, you will still have to repay the debts AND they will now be attached to your house.

Think long and hard about non-bankruptcy debt consolidation options.  Debt consolidation can work well for smaller, more manageable debt loads.  But, debt consolidation is rarely a long-term solution to larger debts.  It only “kicks the can farther down the road.”

Disputing a Debt or Representation in a Lawsuit

Some alleged debts are either incorrect, excessive, or can be settled if you dispute the debt or have proper representation.   It is very important to be proactive if you do not want to file bankruptcy.  You should be disputing and settling debts at every opportunity.

If you are summoned in a lawsuit, it is extremely important that you either hire an attorney to represent you or to properly represent yourself.  Although nobody wants to receive a collection lawsuit in the mail, it does present a good opportunity to settle the debt.  More than likely the creditor would be willing to make some serious concessions on either the settlement or repayment of the debt if you remain proactive and present settlement options.   If you do nothing or do not answer the lawsuit, usually a default judgment will be entered which will require you to repay the entire alleged amount that the creditor requested in the lawsuit.

Do Nothing or Claiming “Judgment-Proof” Status

Sometimes the simplest solution is best: do nothing.   If you do not have any income or accounts that can be garnished and do not own real estate, you may be in a status that most people refer to as “judgment proof.”  The idea behind being judgment proof is simple: you cannot take away what somebody does not possess.    Usually, retired people on social security who do not own real estate or have substantial assets fit into this category.

Other times, it can simply be best to do nothing whether you are judgment proof or not.  If a large creditor has not contacted you for some time about the debt, consider not contacting them: you may awake them to renewed collection efforts.

In contrast to “doing nothing,” bankruptcy does provide closure, predictability, and the rebuilding of credit.   Just because doing nothing may work for some period of time, you may still want to file bankruptcy to have a more protected and reliable foundation upon which to rebuild your finances.

Is The Battle Worth The Cost?   Knowing When to File Bankruptcy

Whatever options you seek to rebuild your financial situation, make sure to know when to stop fighting the battle.  If you are going to be in the same place as your are now in 2-3 years, bankruptcy through Chapter 7 or Chapter 13 may be the more powerful and cost-effective solution you need.

Chapter 7 can many times quickly release you from all of your debt and help you rebuild your credit.  Chapter 13 is the bankruptcy “debt consolidation” option that gives you better terms and is backed up by “bullet-proof” federal bankruptcy law protection.   Seek alternatives to bankruptcy, but do not fight a battle that no one was ever meant in our nation to fight.  Use bankruptcy options when they become the best long-term solution to your situation.

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